Endowus launches CPFIS portfolios with markedly lower fees

FEE-ONLY financial advisory firm Endowus is launching its portfolio service for savings in the CPF Investment Scheme (CPFIS) where all-in fees are estimated to be significantly lower than the market.

Its entry into the CPFIS arena coincides with the award of the CPF Investment Administrator status to UOB Kay Hian, which has just become the fourth IA in the scheme. Endowus will be working with UOB Kay Hian for its CPFIS portfolios.

The effective cost of Endowus' portfolios for the CPFIS is estimated at 0.98 per cent for a balanced portfolio. This comprises an all-in wrap fee of 0.4 per cent, including UOB Kay Hian's admin charge. It also assumes a net fund annual management fee of 0.58 per cent after rebating all trails to the investor.

Endowus' charges are less than a third of the estimated going charges for a CPFIS portfolio in the market where the first year cost may be 3.52 per cent. The latter assumes a sales charge of 1.5 per cent, gross fund annual management fee of 1.2 per cent and a wrap advisory fee of 0.7 per cent. This is a conservative estimate as the annual management fees of equity funds in the CPFIS easily exceed 1.2 per cent.

Set up last year, Endowus has set out to spread the word that returns would be significantly enhanced if costs were kept low. It charges a wrap fee but takes no sales charges. It also rebates a portfolio's underlying funds' trail fees back to investors.

Trail fees are the portion of funds' annual management fees that is typically paid to distributors such as banks and financial advisers. Typically a fund administrator like iFast collects the trail, retains a share of it, and pays the rest to advisers and distributors on its platform. The trail fee may comprise as much as half of a fund's annual management fee.

In the cash market, Endowus may invest in the institutional share classes of funds, where annual management fees are significantly lower than the retail share class, because they are not structured to pay a trail fee. CPFIS-included funds are mostly the retail share classes.

For the CPFIS, Endowus' effective wrap fee at 0.4 per cent is believed to be the lowest in the market. This fee is already in line with CPFIS' intention to lower the cap on wrap fees from the current 0.7 to 0.4 per cent by next October. It also does not collect any sales charge - again ahead of CPFIS' rules. The current cap on sales charges stands at 1.5 per cent.

CPFIS had intended to cap advisers' wrap fees at 0.4 per cent and slash sales charges to zero from October this year. But this has been delayed for a year and will take effect in October 2020 instead. "This is in response to industry feedback that financial advisers require more time to adjust to the revised CPFIS fee structure," said the Manpower Ministry in an earlier statement.

Of UOB Kay Hian's CPFIS IA status, the firm's chairman Wee Ee Chao said: "We are pleased to have received the CPF Board's approval, and believe that we have the potential to make a significant impact on Singaporeans' lives via the CPF system. We have chosen to partner with Endowus, because we believe that we need to be at the forefront of financial and technological innovation in order to continue to grow and evolve our business."

Endowus chief investment officer and co-founder Samuel Rhee says: "We are excited that Endowus will be the first digital advisor on the UOB Kay Hian CPF investment administrator platform for the CPFIS. UOB Kay Hian's inclusion enables us to provide access to globally diversified portfolios at the lowest cost possible.

"The new Endowus CPF investing service is a part of the personalised and holistic retirement solution that we want to provide through the cutting-edge Endowus digital advisory platform. This will help all CPF members achieve their goal of securing their financial future by growing their CPF savings for retirement."

Endowus CPFIS portfolios are likely to be populated with CPFIS-included funds from managers such as Schroders, Legg Mason and UOB Asset Management.

There has been increasing scrutiny on the role of costs in fund performance. Morningstar recently announced a change to its forward looking fund ratings, effectively "doubling down" on fees. This will take effect on Oct 31. The ratings will also be tailored to individual fund share classes, taking fee differences into account.

Said Jeffrey Ptak, Morningstar head of global manager research: "The enhanced framework sets a higher bar for strategies to earn a Gold, Silver or Bronze rating, and we are placing a greater emphasis on the importance of fees."

An explanation of the new methodology says with regard to fees: "Morningstar and independent academic research have shown that expenses are one of the better predictors of future outperformance when evaluating net-of-fee returns. Given this, costs form a critical part of our analysis. To accurately reflect investor experience, rated vehicles are directly penalised by the amount of their fee, inclusive of any performance fee charged, when we assign the rating."